Then, note that a lot of the actual bailout is being done with *new* money, instead of debt, and the comparison gets even more silly. But the monetary model for inflation says that when you’re deflating, money supply is too small — and we’re deflating at about an annualized 18 percent per year, there’s room for new money.
People who read me know I’ve been worried about deflation for a long time - in fact, my deflation worries long predate Daily Pundit itself.
I’m more concerned about deflation now than I ever have been, especially since the Feds have pretty much shot their anti-deflationary interest-rate quiver into the air, and there’s not a heck of a lot left with which to fight a global deflation - which is what we are entering into now, I think.
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Although this is kind of interesting. Apparently the Weimar Republic had a brief period of deflation just before the hyperinflation kicked in, for reasons that look a bit similar to our current situation. Here’s a chart:
Eighteen percent deflation? How does he figure? Gasoline prices are finally going down, but energy prices are still up (something like 40% where I live, plus other utilities), food is more expensive, insurance is up (my health insurance went up almost 20% and I have no claims), consumable goods like clothes and books are more expensive, computer and electronic hardware is going up. Taxes are up, at least locally. Stamps are more expensive, for crying out loud.
We have never had a single month of deflation, much less an “annualized” rate of 18% deflation.
Housing is down, but not down to where it was before the ludicrous run up, so it’s only deflationary compared to the peak.
The government wavers, but we’re somewhere in the 5-10% inflation rate. The shadow stats guys puts it around 14%.
Oops, saved my post too soon. I meant to add that, as he points out, deflation tends to happen when the money supply contracts. With the Fed printing up and burning through $15 trillion since September, there cannot be a contraction. We more than doubles out annual GDP with that “new money.” That’s a tsunami of expanding money, not deflationary contractions.
The dollar just had it’s biggest one day drop against the Euro. That happened after the fed dropped the interest rate to zero. We are going to have hyper inflation - we have gone beyond printing too much money as we are not even printing it anymore it’s just appearing on ledger sheets. Prepare to use your wheelbarrow filled with hundred dollar bills to buy your loaf of bread. And Bush and the faux democrats are still in power, wait till the real deal Keynesians get going in January.
Meaning no disrespect, Bill: I don’t think I’ll enjoy the deflation we are entering much more than anyone else. However, that doesn’t mean that we should do everything we can conceive of to prevent it. The deflation is happening for a reason, and I respect that reason, even if it will hurt when it bites us all.
Another way to put this is that at this point, all roads lead to deflation, and that, at some point, our efforts to prevent that do more harm than good, and will only make the deflation endgame worse in the long run.
I don’t understand how you get from my post to your response, Calm. Enlighten me as to what you think I meant, please?
Fed’s Bullard: U.S. deflation an issue Fed must face | U.S. | Reuters
U.S. inflation drops most on record
Bernanke pulls out his cannon to protect U.S.
I’ve been working on a theory that in a fiat currency, hyperinflation is ultimately Deflation in another form. If Deflation is the contraction of the money supply, in a system where the units of money, in this case US Dollars, can be expanded infinitely, the attempt to avert the deflationary contractions in the number of monetary units by printing up lots of additional monetary units, is counteracted with a contraction in the value, in real purchasing power, of each monetary unit. In the end, hyperinflation gets you to the same point. It just destroys the accumulated capital of the economy (accumulated savings and investment) rather than the number of monetary units, which are merely abstract representations of that accumulated capital (wealth).
I’m not sure what you meant, Bill. It was possible to me that you meant, “darn, the Fed’s interest rate cuts aren’t working, they need to do more.”
I’m new here and don’t already know your position on the subject. “Deflation worry” and “concern about deflation” could mean, “Crap, this is going to be a nightmare,” or “Crap, we need even larger fiscal and monetary interventions than have already been tried.
I said “meaning no disrespect” because I wasn’t sure where you stood and wanted to err on the side of being polite if we disagree.
Yeah, I’m worried about deflation. And I don’t think the governments can do a damned thing to stop it. Here’s the situation: We have been the debt society for decades. Deflation destroys debt because it forces liquidation. On the other hand, it rewards savings, thrift, prudence, restraint, and so on.
Of the two - Weimar-style inflation or Depression-style deflation - I prefer the second. Up until FDR, in fact, America experienced periods of both inflation and deflation, enough of each so that net inflation/deflation over the couple of centuries preceding the New Deal was just about zero.
But because deflation has been artificially staved off by destroying the value of our currency, the medicine necessary to fix the problem will be that much more unpalatable.
I think what annoys me most about the whole situation ( and what I referenced obliquely in the post) was the prevailing notion among our financial elites that deflation was not only unthinkable, it was impossible.
They are still rattling off that mantra, now focused on the lesser declines in the core rates. They whistled the same tune about the housing crisis, the debt crisis, the liquidity crisis, and every other problem faced by their whistling-past-the-graveyard, Pollyanna, rationally ignorant, wilfully stupid economic policies of the past eighty years.
Hear that sound? It’s the Piper, all grown up, kicking in your front door and demanding his long-overdue payment. People are shocked by the Madoff Ponzi scheme. Hell, the entire US government is a Ponzi scheme on a monumental level.
Deflation was not the biggest problem in the Depression. Only 2 years of the Depression, 1931 and 1932, had significant deflation, about -9% and -10%, respectively. Then a handful of years had 0% inflation or minor (-1% to -3%) deflation: 1929, 1930, 1933, 1938, and 1939.
All the other years had regular inflation, 1% to 5%. That’s 1934, 1935, 1936, 1937, 1940, and 1940. So, half of the Depression was deflationary, half was inflationary, but only 2 years had any significant (as in, anybody would notice) deflation. And several of the boom years in the 1920s and in the 1940s had minor deflation, so it can’t have been that big a deal.
All of the stats, since 1914, are available here.
All that to say, I’m not afraid of deflation. Deflation means money has value, which, ultimately, means everything else (including social order) retains its value.
I’m terrified of hyperinflation. Collapsing the trust in the currency is the same as collapsing the trust in the government. That’s what leads to violent revolutions.
Not that I’m against revolutions, per se. I’d love a principled one, based on belief and reason (and a fair amount of passion), like the original Revolution. But hyperinflation and wide-spread poverty leads to riots and mob actions. I don’t trust mobs, and I’m afraid of what would emerge on the other end.
Oh, that previous post should have read, “That’s 1934, 1935, 1936, 1937, 1940, and 1941.” All the good, solid, pre-WW2 Depression years.
As has been pointed out before, what makes a deflationary depression so horrible is the massive unemployment that comes with it. Deflation’s grand, if you’ve got money or a steady job. The trouble begins when you lose either (or both). A ten dollar hamburger is survivable, if you’ve got ten dollars. A ten cent hamburger is not, if you don’t have ten cents.
Well, Bill, now I’m sure. You and I basically agree on this one. Sorry for the confusion.
To boil it down - any hamburger price is not survivable, if you can’t pay for it - whether it’s ten cents or ten million bucks.
I think Kenny may be onto something with his thesis about the actual effects of hyperinflation and deflationary collapse being about the same.
Guys, if you’re not familiar with George Reisman, check out his blog: http://georgereisman.com/blog/
I hit submit too soon. He’s an economist who is of the Austrian/classical British/Objectivist and has some great insights into what is going on.